Asia changes — will Japan change with it?

Chinese President Hu Jintao’s visit to India this week supposedly signifies a shift in Asia, as Hu’s visit indicates that the region’s two emerging giants are drawing closer to one another. This conventional wisdom perhaps contains not a small amount of wishful thinking, because, as this article in the FT suggests, major differences remain between the two powers.

The visit nevertheless contains an important lesson for Japan.

Experts are quick to point out that this is the first time that China and Japan have been strong at the same time, but that won’t be the case for long unless Japan remains a top-tier economic and political power.

Continuing economic and administrative reforms initiated under Prime Minister Koizumi are important, but the government needs to develop a comprehensive aim for reform. Why is Japan reforming? Is it simply to revive the manufacturing powerhouse that looked like it would overtake the US in the early 1980s? If so, Japan will find that the manufacturing field is more crowded than in the 1980s — and China is leading the way as the workshop of the world. With a declining, aging population Japan will eventually be completely out-classed (although China is due to age rapidly in coming decades).

The task for Japan? Make the same leap to a post-industrial, service-based economy, just as the US and European economies are in the midst of doing. Shirakawa Hiromichi, chief economist at Credit Suisse, made this argument in an op-ed in the English version of the Asahi Shimbun.

His main point:

A rise in the share of the service sector in the overall economy can stoke job and wage growth, which in turn can bolster consumer spending, leading back to yet more job and wage growth. This virtuous cycle would make companies more willing to distribute accumulated profits to their employees.

This shift would have massive implications for Japanese society, beginning, perhaps, with education, because a service economy has to educate its children to be flexible, creative, and enterprising — very different than the education provided to students in an industrial society.

The Abe Cabinet does not appear to be thinking in this terms; Finance Minister Omi Koji has, in fact, insisted that Japan will remain focused on industrial production. In a time of change in the region and the world, the government — and all of Japan’s governing class — has to be more imaginative in thinking about how Japan can retain its international position in a rapidly changing region. The first step should be conceiving of broad renovation of Japanese institutions.